Security Interest

A security interest is a legal claim on collateral that a borrower pledges to a lender as part of a loan agreement. This interest gives the lender the right to take possession of the collateral if the borrower defaults on the loan. Security interests are commonly used in commercial financing and personal loans, ensuring that the lender has a legal right to the asset in case of non-payment.

Example

When a company takes out a loan to buy a fleet of vehicles, the lender may take a security interest in the vehicles, meaning the lender can repossess them if the company fails to make payments.

Key points

• A legal claim on collateral used to secure a loan.

• Protects lenders by giving them rights to the asset if the borrower defaults.

• Common in both commercial and personal loan agreements.

Quick Answers to Curious Questions

What are the advantages of a security interest for lenders compared to unsecured loans?

Security interests provide lenders with a legal claim on assets, reducing their risk in case of default.

How does the existence of a security interest affect a borrower’s financial flexibility?

It may limit the borrower’s ability to sell or use the asset as collateral for other loans until the debt is fully repaid.

What role does security interest play in bankruptcy proceedings or insolvency?

In bankruptcy, secured creditors (those with a security interest) are often prioritized in terms of repayment, ensuring they have a better chance of recovering some or all of the owed debt.